Using it on real decisions
Part 1 gave you a number. This part is about what the number can and cannot decide for you, which turns out to be the harder half.
Build it yourself: what a degree costs
Tuition is the number everybody argues about. It is also the smallest of the three costs a degree actually carries. Here is the calculator for all three, built from your own figures.
- Money paid out. Tuition, fees, housing, books.
- Income you did not earn. Every year you spend studying full time is a year you are not being paid.
- Growth you did not earn. Both of the costs above land early in your life, when money would have had the longest time to compound. Almost nobody counts this one.
The wages figure is yours to choose on purpose. Putting a real number on it is part of the exercise, and it varies enormously by where you live and what work you could get at 18.
Where the arithmetic runs out
Here are three ways to spend $3,000 at age 18. Before you read the figures, decide how you would rank them.
A. A used car
It is unreliable, but it gets you to a job you cannot otherwise reach.
B. A trip with friends
Three weeks. You will remember it for the rest of your life.
C. Leave it invested
You do not spend it at all. It sits there until you are 65.
Rank them, and say why
Put them in order and give a reason for each. The reason is the part that matters. If your reason for C is only that it ends with the most money, notice that you were told that before you ranked anything.
What this model leaves out
The calculators in this module are deliberately simple. Here is what they do not do, so you know where to stop trusting them.
- They assume a steady return. Real markets do not deliver 5% a year, they deliver something different every year and average out over long periods. Order matters, and Module 3 covers why.
- They assume you would have invested the money. If the alternative to spending is leaving the cash in a checking account, the growth you gave up is close to zero and these figures overstate the cost.
- They ignore tax. Investment gains are usually taxed at some point, which lowers the real figure. How much depends on the account and the country.
- They ignore what the money buys. The three cards above have the same cost and are obviously not the same decision.
- They stop at 60 years. Past that the numbers get spectacular, and the idea that a rate holds steady for that long gets much harder to defend. The box is capped so the page cannot print a figure it could not stand behind.
The model checks page shows the tests this arithmetic has to pass before it ships, including the errors those tests caught while this module was being written.
Write it down
Answers stay on this device. Nothing is graded and nothing is sent anywhere.
1. Your own decision
Name one purchase you have made or are about to make. What is the price, what does the calculator say it costs you, and does knowing the second number change your answer?
2. A choice worth its cost
Now name something you would spend money on even after seeing the opportunity cost. Say why. This one has no wrong answer, and if you cannot think of anything, that is worth noticing too.
3. The part you distrust
Read the list of what these models leave out. Which item would change your answer to question 1 the most, and in which direction?
Check yourself
Answer each one before revealing ours. If you read our answer first you will agree with it, which tells you nothing.
1. Explain it in your own words
Say what opportunity cost is without using the words "opportunity" or "cost". If you get stuck, what you have memorized is the term. The idea underneath it is the part worth having.
2. Predict the direction
Two people each spend $1,000. One is 18, one is 45, and both retire at 65. Who gave up more, and roughly how many times more?
3. Spot the missing side
Someone tells you that buying a $25,000 car at 39 "really costs $90,000" by retirement. What have they measured, and what have they left out?
4. Break the model
Describe a situation where these calculators give a number that would be wrong to act on. There are at least five, and they are listed above.
Four situations you have not seen
Every problem in Part 1 was laid out the way this module lays things out. Getting them right might only mean you have learned the layout. These four are set up differently. In three of them, the arithmetic on its own points at the wrong answer.
Save or hand in your answers
This writes out everything saved on this device for Module 1, both parts: your opening guess, every problem you attempted with the answer beside it, and all four written answers. It is a plain text file, so it opens on anything and attaches to anything.
Everything here is read out of this browser and written into a file on your own machine. Nothing is uploaded, because there is no server to upload it to. If you are on a shared or school computer, use Clear my answers when you are finished so the next person does not find your work.